Reference no: EM131923690

Bent Creek Company is considering launching a product line extension - a "new and improved" version with enhanced product features and environmentally friendly packaging.

Below are key estimates and assumptions associated with the project:

Project life (in years)   4

Initial cost of equipment  $ 2,300,000

Initial Increase in Inventory  $ 50,000

Initial Increase in accounts receivables  $ 120,000

Initial Increase in accounts payables  $ 30,000

Gross sales from the new product line in year 1  $ 1,500,000

Gross sales increase after year 1 (per year)  7%

Operating costs excluding cost of launching (as a% of gross sales)   25%

Launch costs in year 1  $ 75,000

Market research cost prior to the start of the project   $ 60,000

Inflation estimate per year (included in sales)  3%

Weighted average cost of capital   12%

Marginal corporate income tax rate   35%

Net working capital will be 10% of sales starting year 1. The new equipment is depreciated on a straight line basis over the life of the project. It is estimated that the new product will result in cannibalization of existing sales by an amount of $75,000 per year. The new equipment is estimated to have a salvage value of $150,000 in 4 years.

Create a spreadsheet solution to this problem and answer the following questions.

1) Using the above information (base case scenario), calculate the criteria needed to determine the project feasibility; Payback, NPV, IRR, MIRR, PI.

2) Based on the above feasibility analysis, would you recommend the new product line extension? Why?